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Distorted Performance Measures and Dynamic Incentives

Author

Listed:
  • Kaarbøe, Oddvar M.

    (Programme for Health Economics (HEB), Department of Economics, University of Bergen)

  • Olsen, Trond E.

    (Department of Finance and Management Science, Norwegian School of Economics and Business)

Abstract

Incentive contracts must typically be based on performance measures that do not exactly match agents’ true contribution to principals’ objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that stronger ratchet effects or more distortion may increase optimal monetary incentives, and that bureaucratic promotion rules may be optimal.

Suggested Citation

  • Kaarbøe, Oddvar M. & Olsen, Trond E., 2006. "Distorted Performance Measures and Dynamic Incentives," Working Papers in Economics 07/06, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2006_007
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    Cited by:

    1. is not listed on IDEAS
    2. Dietrichson, Jens, 2013. "Coordination Incentives, Performance Measurement and Resource Allocation in Public Sector Organizations," Working Papers 2013:26, Lund University, Department of Economics.
    3. S. Sinan Erzurumlu & Nitin Joglekar & Moren Lévesque & Fehmi Tanrisever, 2019. "How Angel Know-How Shapes Ownership Sharing in Stage-Based Contracts," Entrepreneurship Theory and Practice, , vol. 43(4), pages 773-801, July.
    4. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Sara Martinez-de-Morentin, 2017. "Performance Measurement and Incentive Intensity," Journal of Labor Research, Springer, vol. 38(4), pages 496-546, December.
    5. Oddvar Kaarboe & Luigi Siciliani, 2011. "Multi‐tasking, quality and pay for performance," Health Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 225-238, February.
    6. Peter O. Christensen & Hans Frimor & Florin Şabac, 2020. "Real Incentive Effects of Soft Information," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 514-541, March.

    More about this item

    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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